AT&T's (NYSE: T) seemingly star-crossed love affair with T-Mobile has been getting the lion's share of media attention since that merger deal was announced last March. But even if that $39 billion proposal does manage to get Department of Justice and Federal Communications Commission approval, it possibly would have less an effect on the telecom industry than the $3.6 billion wireless spectrum deal that Verizon (NYSE: VZ) just made.
On Friday, SpectrumCo, a joint venture currently made up of Comcast (Nasdaq: CMCSA), Time Warner Cable (NYSE: TWC), and Bright House Networks, agreed to sell 122 Advanced Wireless Services (AWS) spectrum licenses to Verizon Wireless. Those licenses cover a population of 259 million. But if this deal was just about spectrum, the cable companies probably would have held on to that valuable commodity as some protection against the long-term threat wireless poses for cable.
More than spectrum
This is a "complete reordering of the competitive universe as we know it today," analyst Craig Moffett of Sanford Bernstein & Company wrote in a report, according to The New York Times. He was referring not to the spectrum but to the marketing agreements Verizon reached with the cable companies.
Comcast, Time Warner Cable, and Bright House get more than the profit they made on the deal. They will now have the opportunity to get into the wireless biz by reselling Verizon's wireless services. Verizon will now be able to market the cable companies' services.
Past forays into wireless have not been promising for the cable companies. Last month, Cox Communications closed down its wireless unit indicating it lacked the scale needed to compete with the established mobile carriers.
This may turn out to be a true win-win arrangement, but with Verizon getting the uppercase "W." That's because it will have the upper hand in seven out of the eight dominant markets nationwide if AT&T's pending spectrum deals with T-Mobile and Qualcomm (Nasdaq: QCOM) aren't approved. It now holds five of those markets.
Another problem for Clearwire
Just previous to the Verizon/SpectrumCo announcement Friday, another important telecom event happened: Sprint Nextel (NYSE: S) signed last-minute contract agreements with its 4G WiMAX network provider Clearwire (Nasdaq: CLWR). This was great news for Clearwire, as it gave some breathing room to the company, allowing it to take the gun away from its head and pay the $237 million interest payment that was due that afternoon.
But the Verizon deal later that day turned Clearwire's smile upside down. Telegeography reports that Comcast and Time Warner Cable, with their new-found 4G LTE wireless reselling deal with Verizon, may no longer feel the need to look to its current partnership with Clearwire and its slower WiMAX technology for wireless service.
If you can't fight 'em, join 'em
Analyst Craig Moffett called this deal "a partnership between formerly mortal enemies." And so it's even more remarkable that the agreement calls for the cable companies and Verizon to collaborate on developing products that will incorporate mobile and cable technologies. Those may include cable boxes, televisions, and smartphones that can work together.
One thing the cable companies could get that Verizon -- and AT&T -- already have will be the ability to market a quad-play bundle: mobile-phone service along with their existing video, Internet, and home-phone services.
Comcast's president of cable, Neil Smit, told The New York Times that "We'll be marketing Verizon Wireless' products, and they'll be marketing our products." Another Comcast executive == this one anonymous -- implied an even closer relationship: "We'll be joined at the hip going after new customers."
Future spectrum costs
Wireless spectrum is a finite resource, and the removal of this big chunk of it from the market can only increase its value, making it that much pricier for AT&T to match Verizon's big footprint.
For a price tag less than one-tenth that of the AT&T/T-Mobile merger proposal, Verizon seems to have leveraged itself into an even more commanding position. Should this have been the deal AT&T sought to make instead of the one it made for T-Mobile?
We'll have to wait and see how the FCC and the DOJ treat this agreement, but if it comes up clean then I'd have to rate Verizon "outperform" in CAPS.
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